Bahrain: Year in Review 2018

Strong non-oil sector and foreign direct investment (FDI) growth combined to deliver Bahrain momentum through 2018, with the country’s biggest hydrocarbons discovery in decades expected to strengthen its fiscal position in the years ahead.

Non-oil expansion accelerated from 1.8% year-on-year (y-o-y) in the first quarter to 2.8% in the second, helping overall growth pick up from -1.2% y-o-y to 2.4% over the respective quarters, according to the Bahrain Economic Development Board (EDB).

For 2018 as a whole, the EDB forecasts the non-hydrocarbons segment to have expanded by 3.8%; however, a 0.5% contraction in the oil and gas sector is expected to bring real GDP growth of 3.1%. While this would represent a slight decrease on the 3.7% posted in 2017, it is still higher than the 2.5% upswing predicted for the GCC as a whole.

Meanwhile, the IMF forecasts constant GDP growth of 3.2% for Bahrain in 2018, down slightly from 3.8% last year.

Construction leads non-oil expansion

The main driver of non-oil activity in the first half of 2018 was the construction sector, which expanded by 6.7% y-o-y. Much of this was driven by ongoing infrastructure projects, with those funded by the GCC Development Fund valued at $3.7bn in the third quarter, up 12.7% on 2017.

Solid progress was made on numerous major infrastructure projects during the year, including the $1.1bn passenger terminal at Bahrain International Airport, which according to local media reached 60% completion in July 2018 and is set for a soft opening in the second half of 2019.

Regional business intelligence firm MEED put the total value of infrastructure projects in the kingdom at $87.3bn in September, up 3.8% on the same point in 2017.

Another key development under construction is Aluminium Bahrain’s $3bn Line 6 smelter expansion. Set to come on-line in January 2019, the new line will lift annual output by around 540,000 tonnes to 1.5m, which will in turn see the company account for roughly 25% of the GCC’s aluminium production capacity.

As much as 80bn barrels of tight oil and 20trn cu feet of gas were discovered in April in the Khaleej Al Bahrain basin, with Sheikh Mohammed bin Khalifa Al Khalifa, the minister of oil, telling press at the end of the year that talks were already being held with companies about drilling for gas.

Regarding the new oil resources, two test wells are currently being drilled, with Sheikh Mohammed suggesting that the kingdom would make invitations to tender towards the end of 2019.

Positive progress was also made in the downstream segment in 2018. As of December, a $5bn modernisation programme being undertaken by the Bahrain Petroleum Company (Bapco) was nine months into its engineering, procurement and construction phase.

The plan entails significant expansion and upgrades to Bapco's facilities, allowing it to increase processing capacity at its Sitra oil refinery from 267,000 barrels per day to 380,000 by 2022.

FDI builds further on 114% growth in 2017

According to a report issued by the UN Conference on Trade and Development, FDI rose by a record-breaking 114% in 2017 to $519m, and the momentum appears to have continued into 2018: the EDB reported that the total value of the investment projects it supports rose 137% y-o-y in the first three quarters to $810m.

Some 76 companies contributed to this figure – up from 71 in 2017 – with 31 of these firms being in the manufacturing and logistics sectors, including Italy-headquartered water heater maker Ariston Thermo, which inaugurated its first Middle Eastern production plant in the kingdom in May.

With the manufacturing industry expanding 4.3% y-o-y in the first half of 2018 – second only to the construction sector in terms of rate of expansion – the recent influx of international manufacturers suggests that more growth is set to come from the sector in the near term.

Meanwhile, as further evidence of the broad-based nature of Bahrain’s non-oil growth, the entrance of 15 firms from the tourism, real estate, education, health care and ICT sectors was also facilitated by the EDB in the January-June period.

Government debt at nearly 90% of GDP

While economic diversification efforts have yielded tangible results, the kingdom continues to witness growing levels of public debt.

The IMF forecasts that gross government debt will rise from 88.4% of GDP in 2018 to 91.7% in 2019 and 97.6% in 2020, warning in its most recent Article IV consultation – concluded last July – that fiscal reform was urgently needed.

In a move to address this, the government unveiled a multi-year Fiscal Balance Programme in the final quarter of 2018, supported by a $10bn fund made available by fellow GCC members Saudi Arabia, the UAE and Kuwait.

The strategy aims to achieve an annual saving of BD800m ($2.1bn) over the coming years via a variety of initiatives, including boosting the efficiency of state expenditure, streamlining government processes and subsidies, and implementing a voluntary retirement scheme for state employees.